Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on March 22, 2021 - March 28, 2021

THE secondary market fundraising scene has got off to a roaring start. In January alone, companies raised some RM540 million from placements and rights issues in the equities market.

The pace of fundraising in the secondary market is a continuation from last year, when some RM8 billion was raised even though the economy went into recession. The fundraising was helped by a relaxation in the rules that allows companies to now issue up to 20% of their share capital to raise funds and stay afloat.

Normally, companies are allowed to issue only up to 10% of their share capital, for which approval of shareholders is needed at an annual general meeting. The relaxation to increase the number of new shares to up to 20% was made last April and is in effect until the end of this year.

In addition to being allowed to issue up to 20% new shares, at a discount of at least 10% to the market price, some companies undertake an additional 30% placement.

A case in point is VSolar Group Bhd, which undertook private placements and rights issues that saw its share base balloon by more than 400% between June last year and January this year. Last week, the company announced a proposal to place out another 30% in an exercise to be done concurrently with a share option scheme for employees involving 30% of the share base.

If the proposals are approved by shareholders, VSolar’s share base will grow 60% from its current size. What is perplexing is that VSolar has been loss-making for the last 12 quarters. Who are the investors taking up the new share issuances? What kind of returns are they expecting other than getting the new shares at a discount to the market price?

As a measure of check and balance, Bursa Malaysia does not allow the new shares to be placed out to existing major shareholders. Towards this end, the list of those buying the new shares is supposed to be vetted by Bursa and, most of the time, the identity of the placee is not known.

If those who take the placement shares cross the 5% threshold, however, they will have to disclose their shareholding to Bursa. It happened in the case of AirAsia Bhd when it placed out 8.9% to Stanley Choi of Hong Kong this month as part of a 20% placement of new shares.

The low-cost carrier placed out another 100.4 million shares in the second tranche of the placement at 86.5 sen each earlier this week. It is not known who took up the new shares. Nevertheless, those who did are sitting pretty on some paper gains.

Moreover, AirAsia has a good franchise and business model, but is in its current predicament because there is no air travel. The same cannot be said, however, of many other companies that undertake placements without bringing about any change to their business fundamentals.

A case in point is Dataprep Holdings Bhd, where half of a 30% placement exercise completed last December went to Tan Sri Muhammad Ikmal Opat Abdullah of Widad Group Bhd. The other half of the placement went to unidentified third parties.

Dataprep is the best-performing stock this year, even though the fundamentals of the company have changed little. Those who took up the placement certainly should not be complaining.

And existing shareholders should cash out of the company because conventional wisdom suggests that placements should be accompanied by an increase in business and profitability. In the Malaysian context, however, when companies issue fresh equity, the share price rises even though the company has no firm plans as to what the funds raised would be used for.

The usual reason given by companies raising funds is that the proceeds are to be used for working capital and seeking new opportunities. Both reasons are vague and give no indication of how they may lead to a substantial improvement in the business of the company.

New shares are dilutive in nature and do not benefit existing shareholders unless the proceeds bring about higher revenue and profitability and enhance shareholder value.

But that does not seem to worry the major shareholders of these companies that are on a fundraising spree. They are probably enjoying the bullish run on the stock.

Moreover, the major shareholders who are also part of management can always control the company through 30% share option schemes.

Retail investors make up 40% of market participants. A time will come when the appetite of these investors will wane. The music will stop, and those holding equity in companies that have undergone major fundraisings will bear the brunt of it.

 

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